Rishi Sunak has announced in his Economic Statement that the VAT rate in respect of supplies in the UK hospitality sector should be charged at the 5% rate of VAT from 15 July 2020 until 12 January 2021.
Supplies in the Hospitality Sector
Supplies to which the new VAT rate will apply include the provision of food and non-alcoholic drinks either eaten in a restaurant or supplied as a hot take away. It will also include accommodation in hotels, bed and breakfasts, and admissions to attractions such as theme parks, zoo and cinemas.
The VAT Fraction
Where an amount is inclusive of VAT, this can be calculated by applying the VAT Fraction, which has changed to 1/21.
For example, where a supply has been made for a gross amount of £105, the VAT included within this amount can be calculated as:
£105 x 1/21
The Net Amount is £100
The VAT Amount is £5
Does a Business need to change its prices?
The change in VAT rate is being made by the Government as part of a number of fiscal measures to boost the economy. If the tax rate change is passed on through reduced prices, this will stimulate consumer spending, benefitting both businesses and consumers.
As a business you are, however, able to choose the prices which you charge. This therefore means you can decide whether or not to pass on the reduction in VAT rate to your customers.
How to change prices
If you are going to lower your prices, you will need to reduce your VAT inclusive prices to reflect the reduction. To calculate this, multiply your original prices by 105/120, which is equal to 7/8.
For example, if you wanted to reduce the VAT inclusive cost of a supply you make which costs £1.20, you would multiply this by 7/8 to provide the new gross value of £1.05.
When does the new VAT Rate apply?
The 5% rate of VAT will apply to supplies to the UK hospitality industry from 15 July 2020 until 12 January 2021.
It is thought that the VAT rate change will be made by treating these supplies as being reduced rated. However, it is also assumed that the guidance contained within section 30 of VAT Notice 700 in respect of when the VAT rate change applies can be followed. <Click here>.
The normal ‘Tax Point’ rules will apply. For most businesses within the hospitality sector, the supply is made at the same time as payment, meaning it is likely that the business will simply have to change the VAT rate within their till system so that the 5% rate applies after 15 July 2020.
If you are unsure of the ‘Tax Point’ rules in respect of supplies that your business makes, then further advice should be sought.
The normal ‘Tax Point’ rules mean that the ‘Basic Tax Point’ is before 15 July 2020, but as the ‘Actual Tax Point’ is after this date (as an invoice has been issued after 15 July 2020) then the 5% rate should apply.
As other Covid-19 VAT measures have been subject to further amendments, it’s important to check whether any further guidance will be released by HMRC (in particular it will be interesting to see whether HMRC mention how the Eat Out to Help Out voucher scheme will interact with VAT in determining how much VAT is actually due).
For those businesses which are still on the Flat Rate Scheme (many left on the basis that the ‘Low Cost Trader’ rules meant that the scheme was no longer beneficial) the rates applicable to each business activity will be subject to change.
If a business uses the Cash Accounting Scheme, they may need to be able to identify payments received after 15 July 2020, which relate to supplies made before that date.
This is because the ‘Tax Point’ of a supply is not altered by the use of the ‘Cash Accounting Scheme’, but the date that payment is made. On this basis, if a supply of goods or services has been made before 15 July 2020, then the former rate of VAT will need to be accounted for on your VAT return.
For more information, contact our specialist VAT team on email@example.com